The European Commission has kept its economic forecast for Slovenia almost unchanged: it projects Slovenian economy to expand by 3.8% this year despite the unfavourable international environment, whereas end-year inflation is expected to hit 2.6%.
The Commission report, released in Brussels on Thursday, suggests GDP growth will amount to 4% in 2006 and 4.2% in 2007. Meanwhile, inflation is set to edge down to 2.5% in 2006 and 2007.
The report notes that after relatively weak activity in the first quarter, the economy boomed in the second quarter, mainly due to effects in foreign trade linked to the substantial increase in exports of cars to France and Austria. "This year, the economy will continue to be driven by domestic demand while the external contribution turns positive."
For 2006 and 2007, the Commission expects investment expenditure to pick up as production processes are adjusted in order to improve the competitiveness of industry, and investment spending related to construction activity should also stay high, as evidenced by strong growth in the number of construction permits issued.
Private spending, particularly the purchase of durable goods, is likely to remain buoyant. Domestic demand should fuel the economy while foreign demand is also expected to contribute positively to GDP growth against the projections of healthy export growth to continue, the report says.
The Commission also sees export markets recovering as oil prices decrease, and believes "expectations linked to the adoption of the euro will spur domestic consumption." "As imports are set to rise steadily in step with strong private and investment spending, the negative current account is likely to deteriorate further."
The report notes that alignment with the Eurostat rules has caused substantial upward revision of the 2001 and 2003 deficit. "In 2005, however, the general government deficit is set to decline to 1.7% of GDP as the shortfall of the new direct tax regime will be smaller than expected."
"Given the uncertainties surrounding the future amendments to the tax legislation, the forecast for 2006 projects the deficit to increase again against the decision to index pensions to wages and the commitment of the new government to gradually abolish the payroll tax," the report says.
The Commission's figures are roughly in line with the slightly more optimistic domestic projections made by the government Institute for Macroeconomic Analysis and Development (IMAD) and the Bank of Slovenia.
IMAD anticipates that growth for this year and the next is to stand at around 4%, while inflation will be at around 2.5%. The central bank has projected inflation of 2.5% this year and GDP growth at 4.1% in 2005 and 3.8% in the two years afterward.
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